Customer development is a formal methodology for building
startups
A startup or start-up is a company or project undertaken by an Entrepreneurship, entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses including self-employment and businesses tha ...
and new corporate ventures. It is one of the three parts that make up a
lean startup
Lean startup is a methodology for developing businesses and products that aims to shorten product development cycles and rapidly discover if a proposed business model is viable; this is achieved by adopting a combination of business-hypothesis-dr ...
(
business model
A business model describes how a Company, business organization creates, delivers, and captures value creation, value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-pub ...
design, customer development,
agile engineering).
The process assumes that early ventures have untested
hypotheses
A hypothesis (: hypotheses) is a proposed explanation for a phenomenon. A scientific method, scientific hypothesis must be based on observations and make a testable and reproducible prediction about reality, in a process beginning with an educ ...
about their
business model
A business model describes how a Company, business organization creates, delivers, and captures value creation, value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-pub ...
(who are the customers, what features they want, what channel to use, revenue strategy/pricing tactics, how to get/keep/grow customers, strategic activities needed to deliver the product, internal resources needed, partners needed and costs). Customer development starts with the key idea that there are no facts inside your building so get outside to test them. The hypotheses testing emulates the
scientific method
The scientific method is an Empirical evidence, empirical method for acquiring knowledge that has been referred to while doing science since at least the 17th century. Historically, it was developed through the centuries from the ancient and ...
– pose a business model hypothesis, design an experiment, get out of the building and test it. Take the data and derive some insight to either (1) Validate the hypothesis, (2) Invalidate the Hypothesis, or (3) Modify the hypothesis.
Many burgeoning startup companies devote all of their efforts to designing and refining their product and very little time “getting out of the building.”
The customer development model encourages that more time be spent in the field identifying potential
consumers
A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. Th ...
and learning how to better meet their needs.
The Customer Development concept emphasizes empirical research.
Customer development is the opposite of the “if we build it, they will come”
product development-centered strategy, which is full of risks and can ultimately be the downfall of a company.
The customer development method was created by
Steve Blank
Steve Blank (born 1953) is an American entrepreneur, educator, author and speaker. He created the customer development method that launched the lean startup movement. His work has influenced modern entrepreneurship through the creation of tools a ...
. According to Blank, startups are not simply smaller versions of larger, more developed companies.
A startup operates in a fashion vastly different from that of a large company and employs different methods. While larger companies execute known and proven business strategies, startups must search for new business models.
Customer Development guides the search for a repeatable and scalable business model.
History
Customer development was developed by Blank in the 1990s. While writing about his experiences as an
entrepreneur
Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones.
An entreprene ...
in
Silicon Valley
Silicon Valley is a region in Northern California that is a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical area of the Santa Clara Valley ...
for his memoir, Blank began to notice patterns in the startups he was involved with.
Recognizing that startups are not simply smaller versions of large companies, he observed that entrepreneurs need to have a systemized approach to guide their search for “repeatable and scalable business models.”
The revelation led to his first book, ''The Four Steps to the Epiphany: Successful Strategies for Products that Win'', which served as the course text for his first class and heralded the birth of Customer Development, which in turn spawned the Lean Startup movement.
Blank's second book, ''The Startup Owner’s Manual'', is a guide to building a startup using customer development principles.
The four-step process
The customer development method consists of four steps that are designed to help avoid common pitfalls and repeat successful business strategies:
* Customer discovery first captures the founders’ vision and turns it into a series of business model hypotheses. Then it develops a plan to test customer reactions to those hypotheses and turn them into facts.
* Customer validation tests whether the resulting business model is repeatable and scalable. If not, founders should return to customer discovery.
* Customer creation is the start of execution. It builds end-user
demand
In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...
and drives it into the sales channel to scale the business.
* Company building transitions the organization from a startup to a company focused on executing a validated model.
Customer Development Manifesto
The Customer Development Manifesto from ''The Startup Owner's Manual,'' written by Blank and Bob Dorf:
# There Are No Facts Inside Your Building, So Get Outside
# Pair Customer Development with Agile Development
# Failure is an Integral Part of the Search
# Make Continuous Iterations and Pivots
# No Business Plan Survives First Contact with Customers So Use a
Business Model Canvas
# Design Experiments and Test to Validate Your Hypothesis
# Agree on Market Type. It Changes Everything
# Startup Metrics Differ from Those in Existing Companies
# Fast Decision-Making, Cycle Time, Speed and Tempo
# It's All About Passion
# Startup Job Titles Are Very Different from a Large Company's
# Preserve All Cash Until Needed. Then Spend.
# Communicate and Share Learning
# Customer Development Success Begins With Buy-In
Teachings
Blank began teaching Customer Development in his entrepreneurship classes at
Stanford University
Leland Stanford Junior University, commonly referred to as Stanford University, is a Private university, private research university in Stanford, California, United States. It was founded in 1885 by railroad magnate Leland Stanford (the eighth ...
and
UC Berkeley
The University of California, Berkeley (UC Berkeley, Berkeley, Cal, or California), is a public land-grant research university in Berkeley, California, United States. Founded in 1868 and named after the Anglo-Irish philosopher George Berkele ...
. His class,
the Lean Launchpad, was first taught has been adopted by more than 75 universities around the globe. In 2011, Blank's curriculum became the new standard for science commercialization in the U.S. as the
National Science Foundation
The U.S. National Science Foundation (NSF) is an Independent agencies of the United States government#Examples of independent agencies, independent agency of the Federal government of the United States, United States federal government that su ...
adopted it for their Innovation Corps.
Business model
From the customer development view, a business model is a representation of how organizations create, deliver and capture value. It is designed to change rapidly, reflect customer reality and iterate as new information is discovered.
The business model is based on the mantra, “No business plan survives first contact with customers.”
The business plan is an operating document that existing companies write to execute known business models.
However, for a startup, there are too many unknowns to develop a successful plan.
The static business plan necessarily changes as soon as the business comes in contact with its target market.
Startups are involved in searching for the right business model.
The business model is tested in the real world (e.g., through a
Minimum Viable Product
A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development.
A focus on releasing an MVP means that developers potentially avoid ...
) to gather customer input and make necessary changes.
When a successful, repeatable business model is discovered, the company enters the product execution and business plan phase.
Business model canvas
Alexander Osterwalder
Alexander Osterwalder (born 1974) is a Swiss business theorist,Arent van 't Spijker (2014). ''The New Oil: Using Innovative Business Models to turn Data Into Profit.'' p. 70 author, speaker, consultant, and entrepreneur, known for his work on busi ...
and
Yves Pigneur Yves Pigneur (born 1954) is a Belgian computer scientist, and Professor of Management Information Systems at the University of Lausanne since 1984, known for his work on the business model canvas with Alexander Osterwalder.
He is considered a "ma ...
designed the
Business Model Canvas.
The Canvas is a tool to help entrepreneurs structure and plan their business models.
It is designed to change rapidly, highlight alternatives, promote a customer focus and encourage testing.
It can also be used to set up Customer Development hypotheses and to visually track iterations.
The business model canvas is made up of nine blocks:
* Key partners
* Key activities
* Key resources
* Value propositions
* Customer relationships
* Channels
* Customer segments
* Cost structure
* Revenue streams
Osterwalder and Blank have integrated both business model design and customer development hypotheses into the business model canvas. Each of the nine blocks corresponds to one or more Customer Development hypotheses.
When a hypothesis is found to be incorrect, entrepreneurs can apply Customer Development strategies to turn the mistake into a Pivot.
As a Pivot, a failed hypothesis becomes a learning strategy, and the business model can be rewritten.
Minimum viable product
The
minimum viable product
A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development.
A focus on releasing an MVP means that developers potentially avoid ...
(MVP) is “that version of a new product which allows a team to collect the maximum amount of validated learning about customer with the least effort.”
The startup releases the most minimal, core product to start testing early and minimize the total development process time.
The MVP allows entrepreneurs to gather feedback from early adopters to prevent pitfalls and avoid building unwanted products.
The MVP also lets customers point out missing features and necessary changes.
To successfully use the MVP strategy, entrepreneurs must be committed to iteration.
Customer feedback will bring the product or service through several changes before it is finalized.
Hypotheses
Hypotheses are critical assumptions about how a business will work, and include assumptions about target market, pricing, and competitors.
Together, hypotheses make up the business model for a startup.
Testing hypotheses means that the founder has to “get out of the building” and answer three questions about the business:
# Do we really understand the customer's problem or need?
# Do enough people outside of the company care about the problem to deliver huge business?
# Will people care enough to tell their friends, which will help grow the business quickly?
Hypotheses can be tested in several ways. Creating an MVP is one way to quickly test mockups and ideas in the real world, especially with Web and mobile startups.
Hypotheses change as a result of testing and customer feedback.
The changed hypotheses are incorporated into new iterations of the startup business model.
Pivot
The pivot is “a structural course correction to test a new fundamental hypothesis about a product, strategy
rengine of growth.”
It is the process of changing a part or parts of the business model to reflect reality.
The customer development process assumes that most of the initial assumptions of the business model will be wrong.
Pivoting involves recognizing that the original business model is not working, then deciding what changes to make and taking action on those changes. This process is easier to visualize when the business model is drawn out.
While iterating involves small changes like altering a product price, pivoting involves substantial changes like identifying a better target market. The process involves four steps:
# Observe: Observing that the business model isn't working.
# Orient: Orienting to the new facts.
# Decide: Deciding what to change in the business model.
# Act: Acting decisively to make the change.
There are several examples of successful companies that pivoted early on, including
Groupon
Groupon, Inc. is an American global e-commerce marketplace connecting subscribers with local merchants by offering activities, travel, goods and services in 13 countries. Based in Chicago, Groupon was launched there in November 2008, launching ...
, which famously pivoted from a failed social advocacy campaign into a billion dollar daily deal site, and
Fab.com, which pivoted from a social network to a daily deal design site.
Instagram
Instagram is an American photo sharing, photo and Short-form content, short-form video sharing social networking service owned by Meta Platforms. It allows users to upload media that can be edited with Social media camera filter, filters, be ...
pivoted from a mobile
microblogging
Microblogging is a form of blogging using short posts without titles known as microposts or status updates. Microblogs "allow users to exchange small elements of content such as short sentences, individual images, or video links", which may be the ...
platform into a photo application.
References
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Business models